Search Results
Working Paper
Inflation Thresholds and Inattention
Inflation expectations are key to economic activity, and in the current economic climate of a heated labor market, they are central to the policy debate. At the same time, a growing literature on inattention suggests that individuals, and therefore individual behavior, may not be sensitive to changes in inflation when it is low. This paper explores evidence of such inattention by constructing three different measures based on the University of Michigan’s Survey of Consumers 1-year ahead inflation expectations. Exploring inflation thresholds of 2, 3, and 4 percent, our findings are ...
Working Paper
How Markets Process Macro News: The Importance of Investor Attention
I provide evidence that investors' attention allocation plays a critical role in how financial markets incorporate macroeconomic news. Using intraday data, I document a sharp increase in the market reaction to Consumer Price Index (CPI) releases during the 2021-2023 inflation surge. Bond yields, market-implied inflation expectations, and other asset prices exhibit significantly stronger responses to CPI surprises, while reactions to other macroeconomic announcements remain largely unchanged. The joint reactions of these asset prices point to an attention-based explanation–an interpretation ...
Working Paper
Indirect Consumer Inflation Expectations: Theory and Evidence
Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations ...
Working Paper
Recency Effects in Perceived Uncertainty
Firms frequently revise not only their expectations, but also how uncertain they feel about those expectations. Using the U.S. Survey of Business Uncertainty, we study perceived uncertainty about firms’ own sales and employment growth. Reported uncertainty rises after larger revisions to firms’ point forecasts, with the strongest response to the most recent revision. This recency pattern remains visible outside elevated sectoral-volatility episodes. We develop a model in which agents learn about a constant-volatility process but recall older observations noisily. Noisy recall gives recent ...
Working Paper
Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience
We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers’ heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that ...
Journal Article
The Last Mile
Headline inflation in the euro area declined rapidly to 2.9% in October 2023 from its peak of 10.6% one year earlier. The bulk of this large drop reflected the substantial decline in the contributions from energy and food inflation. Once these base effects reverse, continued disinflation relies critically on monetary policy succeeding in reducing underlying inflation in a steady and timely manner. The last mile is about this change in the disinflation process. Large uncertainty around the appropriate calibration and effective transmission of monetary policy, together with the risk of new ...
Working Paper
Janus's Money Demand and Time Inconsistency: A New Impossibility Theorem?
We derive a general “Janus” money demand function that reflects backward- and forward-looking habit formation. The scope of our model allows us to explain the breakdown of money-demand functions and reduced policy relevance of monetary aggregates. Integrating our Janus money demand into a Barro-Gordon framework reveals new insights for time inconsistency in monetary policy and a new impossibility theorem.
Working Paper
Incorporating Diagnostic Expectations into the New Keynesian Framework
Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus ...
Working Paper
How Robust Are Makeup Strategies to Key Alternative Assumptions?
We analyze the robustness of makeup strategies—policies that aim to offset, at least in part, past misses of inflation from its objective—to alternative modeling assumptions, with an emphasis on the role of inflation expectations. We survey empirical evidence on the behavior of shorter-run and long-run inflation expectations. Using simulations from the FRB/US macroeconomic model, we find that makeup strategies can moderately offset the real effects of adverse economic shocks, even when much of the public is uninformed about the monetary strategy. We also discuss the robustness of makeup ...
Working Paper
Macroeconomic Expectations and Cognitive Noise
This paper examines forecast biases through cognitive noise, moving beyond the conventional view that frictions emerge solely from using external data. By extending Sims’s (2003) imperfect attention model to include imperfect memory, I propose a framework where cognitive constraints impact both external and internal information use. This innovation reveals horizon-dependent forecast sensitivity: short-term forecasts adjust sluggishly while long-term forecasts may overreact. I explore the macroeconomic impact of this behavior, showing how long-term expectations, heavily influenced by current ...